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GDP / National Accounts Revised Series with 2011-12 as base year

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The new GDP numbers will be liable to changes in future based on change in base year of IIP  WPI and CPI series. These are important indices which play a pivotal role when computing GDP at constant and current prices. Based on revisions of base year of these indices, GDP growth rates may change.
 
The new GDP numbers will be liable to changes in future based on change in base year of IIP  WPI and CPI series. These are important indices which play a pivotal role when computing GDP at constant and current prices. Based on revisions of base year of these indices, GDP growth rates may change.
  
Also see the [http://mospi.nic.in/Mospi_New/upload/new_series_NI.htm FAQ] released by Ministry of Statistics and Programme Implementation on the matter.  
+
Also see the [http://mospi.nic.in/Mospi_New/upload/Understanding_New_GDP.pdf FAQ] released by Ministry of Statistics and Programme Implementation on the matter.  
  
  

Revision as of 11:23, 2 March 2015

The structure of economic activities changes over time due to changes in structure of production and demand in the economy. On production side, the production pattern changes along with changes in technology and innovations in the system and in this process some production become obsolete and other comes in vogue. While on demand side, the consumption pattern also changes over time. The changes in relative prices stimulate changes in the consumption and production choices. Therefore, to account for these structural changes and to update the prices, the rebasing exercise is needed after a certain period. The exercise of rebasing national accounts brings up a fresh lot of information about the changes in economic structure of the economy, along with switching over to new base prices. This also helps in judging the size of the economy, correction of biases and looking afresh at the relative importance of sectors in the economy.

The recent introduction of new series of national accounts by Central Statistics Office (CSO) revised the base for National Accounts Statistics to 2011-12 from 2004-05[1] , which was last set in January, 2010. Along with revision of base, a number of methodological changes have also been made. Despite its comprehensiveness, the Press Note puzzled more people than it explained to; the user being surprised by unexpected moves of growth numbers. Many being apprehensive, warranted for a cautious approach to use new numbers for policy purpose. The confusion prevails on-which numbers should be used, old or new? This note tries to describe the changes made in the new series and why growth numbers for some of sectors, especially manufacturing, witness unexpected changes.

The new series of national accounts is an improvement upon old (base:2004-05) in terms of its comprehensive coverage of Corporate Sector and Government Activities and incorporation recent data generated through National Sample Surveys. It also brings up some change in methods of evaluation, approaches to account economic activities, introduced new concepts and incorporation of new classifications. Originally the base revision was due for 2009-10 but it was postponed due to the global financial crisis. In this base revision to 2011-12 prices, recent data sources such as NSSO Employment-Unemployment Survey 2011-12, Unincorporated Enterprise Survey 2010-11, Household Consumer Expenditure Survey 2011-12 etc. have been used in the estimation.


Earlier "GDP at factor cost" was known as simply the "GDP" in India. It is nothing but sum of the factor costs incurred during the process of turning out economy's output for the concerned year. Thus, it is a compilation of wages, interests salaries, profits etc. This concept - GDP at factor cost - used to be expressed both in constant prices (with 2004-05 prices as the base year prices) and current prices. For most purposes, including academic works, GDP at factor cost in constant prices was used as "GDP". Further by adding net indirect taxes (ie. product taxes - product subsidies), GDP at market prices were also reported in the National Account Statistics. (For details of the calculations one can see the brochure issued by CSO, Ministry of Statistics and programme Implementation)

In the revised series, as is the practice internationally, industry-wise estimates are presented as Gross Value Added (GVA) at basic prices, while "GDP at market prices" will be referred to as "GDP". GVA at basic prices can be referred to as GVA at producer price and GDP at market price as GDP at buyer price. Estimates of GVA at factor cost (earlier called GDP at factor cost) can be compiled by using the estimates of GVA at basic prices and production taxes less subsidies. It would result in effect on size of GVA compared to GDP at factor cost, which may be different for different sector. For example, net production tax being positive in manufacturing would result in higher GVA than GDP in the sector. New growth figures for GVA at Basic prices would also carry an impression of tax and subsidies which was not the case in GDP at factor cost. The production tax has been distinguished from product tax as the first is independent of quantity produced while the second varies with it. Similar distinction is also made between production and product subsidies. GDP at market prices which is henceforth be referred as GDP, can be computed by adding net of production tax and production subsidies in GVA at basic prices.

In manufacturing many argue that the output was falling and then how come the new series shows that manufacturing sector was in fact performing not that bad. It was because although the output was stagnant or less but the value addition was better off. GDP is a measure of value added, it’s not about output. It’s the case of output being stagnant but value-addition is going up.

Earlier the sectoral manufacturing data value addition was sourced from the RBI Industrial Outlook Survey conducted on an quarterly basis; but now with the Ministry of Corporate Affairs making it obligatory on the part of the companies registered under the Companies Act for online reporting, the MCA 21 database has been used for the manufacturing sector value added. The MCA database as on date covers 5 lakh companies and is fairly representative of the universe. The RBI surveys are small in size and not much reliable for the sectoral analysis. Further, the manufacturing value added was calculated from ASI Annual data and extrapolated using IIP for the intervening period. The limitation with this data was that the ASI and IIP are establishment based data while the MCA database goes beyond establishment based value addition and also incorporates data on brand pricing ,marketing etc i.e. includes allied activities which were earlier outside the purview of manufacturing value added. Further the corporate segment manufacturing coverage accounts for almost 66-70 percent of the manufacturing sector.

Incorporation of National Industrial Classification - 2008 (NIC-2008 classifications) for industries is possibly one reason for the adjustments in the activities for an industry. The number of industries has increased from eight in old series to eleven in new series, the additional three industries reclassified within service sector named as “Transport, storage, communication & services related to broadcasting”, “Real estate, ownership of dwelling & professional services”, and “other services”. The description of industries has also been changed for example earlier “Community services etc.” become “Public administration and defence”.

The new, “Effective Labour Input Method” is adopted for Unincorporated Manufacturing & Services Enterprises for compiling the estimates for unorgansied non-agriculture sector. This method assigns due weights to different types of workers based on productivity and skills, unlike the earlier method which assumed equal value addition of each worker, irrespective of their skills and productivity. The adoption of new method is likely result in better estimates of value addition in the unorgansied non-agriculture sector. In the Trade sector the gross value added was earlier calculated using the gross trading index this has been replaced by the index derived from sales tax collections. This would also change in the future when the GST is introduced and the Ministry of Finance is able to collect GST sector wise by invoking the Collection of Statistics Act, 2008.

Then the new series data collected from local bodies is also used and the coverage is 60 percent. The ‘valuables’ segment, which basically comprises of gold and jewellery which is an important component of capital formation , was treated as consumption. In new series valuables are combined into household savings and, therefore, consumption has come down and savings have gone up accordingly. The new GDP numbers will be liable to changes in future based on change in base year of IIP WPI and CPI series. These are important indices which play a pivotal role when computing GDP at constant and current prices. Based on revisions of base year of these indices, GDP growth rates may change.


GDP at factor cost at current prices (at 2004-05 prices)
  GDP in Rs. Crore GDP Growth rates in %
  2011-12 2012-13 2013-14 (PE) 2014-15 (AE) 2011-12 2012-13 2013-14 (PE) 2014-15 (AE)
a. GDP at factor cost 8391691 9388876 10472807 15.8 11.9 11.5
b. net indirect taxes 618031 724405 882266 15.5 17.2 21.8
c. GDP at market prices (c= a+b) 9009722 10113281 11355073 15.7 12.2 12.3
 
As per New Series estimates 2011-12 2012-13 2013-14 2014-15 (AE) 2011-12 2012-13 2013-14 2014-15 (AE)
GDP at factor cost at 2011-12 prices 8206398 9263138 10487074 11702988 12.88% 13.21% 11.59%
GDP at market prices 2011-12 prices 8832012 9988540 11345056 12653762 13.09% 13.58% 11.54%
GDP at factor cost at constant prices (at 2004-05 prices)
  GDP in Rs. Crore GDP Growth rates in %
  2011-12 2012-13 2013-14 (PE) 2014-15 (AE) 2011-12 2012-13 2013-14 (PE) 2014-15 (AE)
a. GDP at factor cost 5247530 5482111 5741791 6.7 4.5 4.7
b. net indirect taxes 385520 417736 454051 6.0 8.4 8.7
c. GDP at market prices (c= a+b) 5633050 5899847 6195842 6.6 4.7 5.0
 
As per New Series estimates (NS) 2011-12 2012-13 2013-14 2014-15 (AE) 2011-12 2012-13 2013-14 2014-15 (AE)
GDP at factor cost at 2011-12 prices 8206398 8609516 9178444 9865247 4.91% 6.61% 7.48%
GDP at market prices 2011-12 prices 8832012 9280803 9921106 10656925 5.08% 6.90% 7.42%
Source: Summary of macro economic aggregates published by CSO. Press releases of CSO dated 30 January 2015 and 9 February 2015


The growth of GVA at constant prices reported higher at 4.9 % in 2012-13 with new base (2011-12) against 4.5% growth of GDP at factor cost at old base (2004-05). In 2013-14, the growth of GVA at new base is reported at 6.6% which was 4.7% at old base. The growth of GVA for manufacturing have shown noticeable rise in 2012-13 and 2013-14, which is updated to 6.2% and 5.3% at new base year compared to earlier 1.1% and -0.7% at old base year respectively. The sectoral share of manufacturing has also substantially increased in 2012-13 and 2013-14, as reported at 17.9% at new base compared to 14.1% at old base in 2011-12. These differences are surely on account of better coverage and changed methodologies and possibly change in concepts and classifications. It is crucial to know how much difference these factors has made to GVA and in which sector.


Central-Statistics-Office.jpgSource: Central Statistics Office.

Note: Estimates for the earlier series (2004-05 series) have been derived from GVA at factor cost, while estimates for the 2011-12 series have been derived from GVA at basic prices.

The growth at constrant prices, computed either using new base or old base prices, should not differ if other thing remains the same. In other words, marely a shift in base year cannot be accounted for the differences in growth at constant prices calculated using new or old base. With this logic, the differences in the sectoral growth rates calculated at constant prices of new and old base is ploted in the graph above. These differences inter-alia shows the under or overestimation bias in the growth of the economy, assuming that estimates in new series are better representation of the acticvities. In overall, the growth of the economy was underestimated with about two percentage point in 2013-14 in the old series. Although the reasons for this bais are not restricted only to structural changes, while the other factors such as conceptual changes, improved valuation methods, better coverage etc. have also been responsible. Among the sectors, the growth of ‘mining & quarrying’, ‘Manfuacturing’, ‘trade, repair and hotels’, ‘transport, storage, etc’, and ‘community serives etc’, appears heavily underestimated, while the growth in ‘Agricultre and allied’ and ‘Financial, real estate & business services’, was overestimated in old series.


Summary


The reasons for the rise in growth for manfaucturing sector at new base are structural as well as change in compilation methodology. The methodological changes includes the change in approach, better coverage, use of new valuation methods and introduction of new concepts. Some of these highlighted in the Press Note are as follows:

  1. The shift from Establishment approach to Enterprise approach: The establishment approach used in Annual Survey of Industries did not capture the activities of a unit other than manufacturing. Whereas, an enterprise along with its manufacturing activities is also engaged in activities other than manufacturing such as ancillary activities etc. Now, in new approach, the activities of a manufacturing company other than manufacturing are accounted in manufacturing sector. The enterprise approach is facilitated by MCA 21 data with Ministry of Corporate Affairs. These changes possibly have increased the coverage of registered sector of manufacturing.
  2. Incorporation of findings of NSSO Surveys: The details of new NSS Surveys viz. Unincorporated Enterprises Surveys (2010-11) and Employment & Unemployed Survey, 2011-12 are now available, therefore incorporated in the new series. The updates are an improvement in the representation of activities in the unorganized manufacturing sector.
  3. The change in Labour input Method: The new series has switched over to “Effective Labour Input Method” for Unincorporated Manufacturing & Services Enterprises. Earlier method was assigning equal weights to all types of worker, while the new method assigns different weight for workers as per their productivity.
  4. The inclusion of production tax less subsidies: The net of production tax and production subsidies is positive in manufacturing, while it is inter-alia negative in ‘agriculture and allied’ and ‘Electricity, gas etc’. Therefore, the positive net production tax would increase the size of GVA in the sector in absolute and relative to other sectors. Moreover, any change, including change in policy, if alters the lump sum production tax and subsidies then this may also likely to reflect in the growth rates in the sector.
  5. In sum, one can say, the vast difference in the new series figures is not just because of updation of the database or change in methodology but more so because of the change in data source. Trend analysis not possible right now but can be tried by working out the difference in the ASI value added and the MCA database, which is left to the academicians.

    The new GDP numbers will be liable to changes in future based on change in base year of IIP WPI and CPI series. These are important indices which play a pivotal role when computing GDP at constant and current prices. Based on revisions of base year of these indices, GDP growth rates may change.

    Also see the FAQ released by Ministry of Statistics and Programme Implementation on the matter.


    1. Base year revisions differ from annual revisions in National Accounts primarily because of nature of changes. In annual revisions, changes are made only on the basis of updated data becoming available without making any changes in the conceptual framework or using any new data source, to ensure strict comparison over years. In case of base year revisions, apart from a shift in the reference year for measuring the real growth, conceptual changes, as recommended by the international guidelines, are incorporated. Further, statistical changes like revisions in the methodology of compilation, adoption of latest classification systems, and, inclusion of new and recent data sources are also made. Changes are also made in the presentation of estimates to improve ease of understanding for analysis and facilitate international comparability. (Source: PIB Press release dated 30 January 2015)


    Contributed by

    • Authors acknowledge with thanks the comments received from Mr.Shirke Shrinivas Vijay (ISS 2011) at the draft stage.
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